Striking Off vs Liquidation
Striking off vs liquidation explained. A practical comparison of the two main routes for closing a solvent UK limited company, covering costs, timelines, asset distribution, tax treatment and the factors that determine which route is right.
When directors decide to close a company , they must choose between two main routes: voluntary strike off and members’ voluntary liquidation (MVL). Both result in the company being removed from the Companies House register, but they differ significantly in cost, process, tax treatment and suitability.
Overview Comparison
| Factor | Voluntary Strike Off | Members’ Voluntary Liquidation |
|---|---|---|
| Cost | £33 filing fee | £1,500 to £5,000+ (liquidator fees) |
| Timeline | Approximately 3 months | 3 to 12 months |
| Professional required | No | Yes (licensed insolvency practitioner) |
| Tax treatment of distributions | Income (dividend) unless below £25,000 | Capital gains |
| Creditor protection | Informal (Gazette notice) | Formal (statutory process) |
| Suitable for | Simple companies with few assets | Companies with significant assets |
Voluntary Strike Off
Voluntary strike off (also called company dissolution ) is the simplest and cheapest way to close a company. The directors apply to Companies House to have the company struck off the register.
Eligibility
The company must:
- Have not traded or carried on business in the previous 3 months
- Have not changed its name in the previous 3 months
- Have no outstanding debts to creditors (including HMRC)
- Have no pending legal proceedings against it
- Not be subject to a winding-up order or a CVA (company voluntary arrangement)
Process
- Settle all debts including tax, VAT, PAYE and supplier invoices
- Close the PAYE scheme and deregister for VAT
- Distribute any remaining assets to shareholders
- File final tax returns with HMRC
- Apply for strike off by filing form DS01 with Companies House (fee: £33)
- Notify all interested parties by sending copies of the DS01 to creditors, employees, shareholders and pension trustees
The application must be signed by a majority of directors. Companies House publishes a notice in The Gazette giving a 2-month objection period. If no objections are received, the company is struck off approximately 3 months after the application.
Tax Treatment of Distributions
Assets distributed to shareholders before strike off are treated as follows:
| Total Distribution | Tax Treatment |
|---|---|
| £25,000 or less | Can be treated as a capital distribution (capital gains tax rates apply) |
| Over £25,000 | Treated as income (dividend tax rates apply) |
The £25,000 threshold applies to the total distribution from the company, not per shareholder. This is a significant limitation for companies with substantial retained profits.
Members’ Voluntary Liquidation (MVL)
An MVL is a formal winding-up process for a solvent company. It must be conducted by a licensed insolvency practitioner appointed as liquidator.
When to Use an MVL
An MVL is typically the better option when:
- The company has more than £25,000 in assets to distribute
- The directors want capital gains tax treatment on all distributions (not just the first £25,000)
- Business Asset Disposal Relief (BADR) applies, giving a 10% CGT rate on qualifying gains up to £1 million
- The company has complex affairs (property, investments, outstanding contracts)
- Formal creditor protection is needed
Process
- Directors make a Declaration of Solvency (a statutory declaration that the company can pay all its debts within 12 months)
- Shareholders pass a special resolution (75% majority) to wind up the company voluntarily
- A licensed insolvency practitioner is appointed as liquidator
- The liquidator takes control of the company, realises assets, pays creditors and distributes the surplus to shareholders
- The liquidator files a final account with Companies House
- The company is dissolved 3 months after the final account is registered
Tax Treatment of MVL Distributions
All distributions in an MVL are treated as capital distributions, regardless of the amount.
| Component | Treatment |
|---|---|
| Distribution | Capital distribution (not income) |
| Capital gains tax | Payable on the gain (distribution minus base cost of shares) |
| Business Asset Disposal Relief | 10% CGT rate on qualifying gains up to £1 million |
| Standard CGT rates | 10% (basic rate) or 20% (higher rate) |
| Annual exempt amount | £3,000 (2024/25) offset against the gain |
HMRC Targeted Anti-Avoidance Rule (TAAR)
HMRC introduced a targeted anti-avoidance rule (s.396B ITTOIA 2005) that can reclassify MVL distributions as income (dividend) rather than capital if:
- The individual receiving the distribution has been involved with the company (or a successor company) within 2 years of the distribution
- The distribution exceeds what would have been received as a normal dividend
- The main purpose (or one of the main purposes) of the winding up is to obtain a tax advantage
This rule is designed to prevent phoenixing — closing a company to extract profits as capital gains, then starting a similar business.
Decision Framework
| Question | Strike Off | MVL |
|---|---|---|
| Assets below £25,000? | Suitable | Unnecessary expense |
| Assets above £25,000? | Poor tax outcome (income treatment) | Capital treatment available |
| BADR qualifying? | Not available on amounts above £25,000 | Available (10% CGT) |
| Complex affairs? | Risky (informal process) | Formal and thorough |
| Outstanding creditors? | Must be cleared first | Liquidator handles |
| Budget for professional fees? | Minimal cost needed | £1,500 to £5,000+ |
Practical Considerations
HMRC commonly objects to strike off if Corporation Tax returns are outstanding, PAYE or VAT liabilities are unresolved, or an enquiry is open. An objection suspends the process until the issue is resolved.
Any assets not properly distributed before dissolution pass to the Crown as bona vacantia (ownerless property). A dissolved company can be restored to the register within 6 years by administrative restoration (applied for by a former director or shareholder) or by court order.